April 23 (Bloomberg) -- Just before noon, the order flickers across a computer screen at JPMorgan Chase & Co. in New York: Sell 25,000 shares of Obagi Medical Products Inc.

``This is going to be a hard trade,'' says broker Tony Baumer, as stock prices and instant messages light up five computer screens in front of him.

Obagi stock has been sinking ever since the Long Beach, California-based drugmaker went public at $11 a share in December 2006. Now, on Jan. 22, Obagi is trading at $8.75, a record low.

Baumer's challenge: to unload his client's shares without pushing the price even lower.

As competition pinches commissions, brokers such as Baumer are trying to win over money managers by getting the best possible price for the shares they trade for them.

Bank of America Corp. does that best, according to data compiled by New York-based Ancerno Ltd. The consulting firm, formerly part of Abel/Noser Corp., a New York-based brokerage founded in 1975, tracks $5.5 trillion of stock trades annually in 70 countries.

Ancerno monitors trading costs for fund managers and collects data from 500 money management firms. Its customers include Kansas City, Missouri-based American Century Investments; Boston-based The Boston Company Asset Management LLC; and Boston-based Fidelity Investments, the world's largest mutual fund company.

The ranking measures the prices brokers get for clients. Sellers want to dump stocks before someone else drives down prices. Buyers want to purchase them before prices rise. For brokers, the trick is to move large blocks of stock without disrupting the market.

Top Brokers

Worldwide, Charlotte, North Carolina-based Bank of America cut an average of 0.012 percent, or 1.2 basis points, off a stock's average price between the time an investor placed an order and the time it was executed during 2006. (A basis point is 0.01 percentage point.)

Zurich-based UBS AG was second in the ranking, with an average advantage of 0.7 basis point, followed by JPMorgan Chase, at 0.5 basis point, and New York-based Citigroup Inc., at 0.2 basis point. Bank of America ranked first in North America as well. Amsterdam- based ABN Amro Holding NV led stockbrokers in Europe. New York-based Morgan Stanley was No. 1 in Asia.

Jim Brett, head of U.S. cash equities at JPMorgan Chase, which was No. 3 globally, and Bret Engelkemier, head of U.S. equities trading at No. 4 Citigroup, say they monitor trading costs and strive to get the best prices for clients. Ross Stevens, co-head of equities at No. 5 Jefferies Group Inc., says Jefferies focuses on brokering stocks of midsize companies, which are more difficult to trade than those of big companies.

Shrinking Fees

``Quarter-to-quarter metrics may change slightly, but our goal will always be the same: providing clients with best execution on a consistent basis,'' Brett, 45, says. Spokespeople for 12 other firms in the rankings declined to comment.

Brokers are working harder than ever for their money. U.S. commissions have plummeted since the U.S. Securities and Exchange Commission abolished fixed fees in 1975 -- and they keep dwindling. The average broker fee on New York Stock Exchange-listed shares fell to 3.9 cents a share in 2006 from 4.2 cents in 2005. In the late 1970s, that figure was 12 cents. Total U.S. stock commissions fell to $10.8 billion in 2006 from $13.4 billion in 2002, even though trading almost doubled during that time.

According to Ancerno data, brokers cost investors a fraction of a dollar on every stock trade. Each trade disadvantaged clients by an average of 0.019 percentage point, meaning brokers sold at a lower-than-average price or bought at a higher-than-average price between the time they got the order and the time they completed it.

Back at JPMorgan Chase, Baumer, 39, is trying to figure out how to unload his client's Obagi stock. He routes an anonymous offer to sell 10,000 shares to the electronic Nasdaq Stock Market Inc., where Obagi trades.

Finessing Orders

He then bypasses the Nasdaq and routes the remaining 15,000 shares to an electronic network called Posit, where brokers trade big blocks of stock anonymously. On Wall Street, networks such as Posit, a unit of Investment Technology Group Inc., are known as ``dark pools.''

Baumer's 10,000-share order on Nasdaq sells at $8.90 a share, 9 cents less than the high for the day. As Obagi sinks through the afternoon, eventually closing in New York at $8.80, Baumer opts to hold the remaining 15,000 shares and see what happens when the New York markets open the next day. He eventually sells them at $9.04 a share as the price rebounds.

``You have to try all the venue options out there and, when necessary, use your own capital to do the trade,'' Baumer says.

Institutional investors -- mutual funds, pension funds and the like -- are paying closer attention to the prices brokers get them, says David Brooks, head of trading at The Boston Company Asset Management.

Closer Scrutiny

New U.S. and European Union regulations require money managers to ensure they're getting the best prices possible. The rules put brokers under even more pressure.

``It's important to regularly measure the quality of our brokers' executions,'' Brooks, 38, says. The Boston Company has $73 billion of assets under management.

From 1995 to 2000, when the Standard & Poor's 500 Index posted an average annual gain of 26 percent and Internet stocks caught fire, money managers didn't pay much attention to how brokers executed orders, Brett says. After all, just about everyone was making money in the stock market.

Now, brokers are coming under closer scrutiny.

``The market has become so much more difficult; people are more sensitized to market impact,'' Brett says. ``As they've become more sensitized, so have we.''

Dark Pools

So-called dark pools such as Posit are one of the tools Wall Street is wielding to scout out prices for big brokerage clients. These computerized networks bypass exchanges such as the Nasdaq and the NYSE, which post bid and offer prices and the size of orders, and match buy and sell orders on a hush-hush basis. Buyers and sellers throw orders into the pool, and if there's a match, a computer program strikes a deal. The trade is posted only after it's done. (Bloomberg Tradebook LLC, a unit of Bloomberg LP, the parent of Bloomberg News, operates a dark pool.)

Posit is one of roughly 30 dark pools that Wall Street firms have set up to compete with exchanges. The brokers employ computer algorithms to sweep different pools and exchanges to spot the best prices within a fraction of a second.

Searching Markets

These days, brokers must be able not only to read the markets but also to understand which algorithms to employ and which pools or exchanges might yield the best prices, says Peter Forlenza, global head of equities at Bank of America.

``Nowadays, better traders are those who can act like portfolio managers,'' Forlenza, 41, says. Almost 20 percent of U.S. trades were matched by dark pools last year.

Dark pools are catching on in Europe and Asia. Last year, 4 percent of all institutional investors in Europe sent orders to dark pools directly, up from less than 1 percent in 2005, according to Greenwich, Connecticut-based consulting firm Greenwich Associates. In Japan, 40 percent of investors polled in one survey said they employed algorithmic trading.

Jason McAleer, who heads the trading desk at London-based Newton Investment Management Ltd., says he monitors the market impact of orders closely. Newton, which has about $67 billion of assets under management, buys and sells shares around the world. The firm does about half of its trading in London, about a fifth each elsewhere in Europe and in the U.S. and the rest in Asia, McAleer, 34, says.

Price and Execution

``How we evaluate broker performance is primarily price and execution,'' he says.

In deciding which brokers to work with, Newton also considers services such as research and a brokerage's willingness to commit its own capital to trades, McAleer says.

Markets have gotten busier now that investors can trade stocks electronically all over the world. That's helped check the impact of orders on prices, Citigroup's Engelkemier says. As individual investors get similar access to world markets, trading will get even smoother, he says.

``The person trading from a desktop in Mexico City may have a very different view than the person trading from Tokyo,'' he says. ``Those different views are what make capital markets efficient.''

The new U.S. and EU rules require fund managers, brokers and exchanges to strive for ``best execution,'' meaning that trades have to be completed at the best price available regardless of venue. U.S. Regulation National Market System, known as Reg NMS, went into effect on March 5. The EU's Markets in Financial Instruments Directive, or Mifid, is due to take effect on Nov. 1.

Shift Ahead

Reg NMS will lead to more orders shifting to alternative trading venues, says Larry Tabb, chief executive officer of Tabb Group LLC, a Westborough, Massachusetts-based consulting firm.

McAleer says it's unclear how Mifid will affect European markets. He praises another set of regulations that went into effect in the U.K. in 2006. The Financial Services Authority required fund managers to disclose what percentages of the commissions they pay to brokers are intended for research and execution.

Traditionally, institutional investors have paid inflated commissions with the understanding that some of the money goes to pay for research from brokers. By breaking out how much of a commission is for research and how much is for execution, fund managers will focus on costs and gravitate toward better brokers, McAleer says.

``We've cut out some of the brokers we didn't value as executors at all, and we're paying for their research via commission-sharing agreements,'' he says.

Such agreements allow money managers to direct their trading orders to fewer brokers, who in turn use a portion of their commissions to pay a third party for research that may be of value to the managers.

Big Brokers Gain

Big brokers stand to gain the most from such changes, says Larry Leibowitz, chief operating officer for U.S. equities at UBS in Stamford, Connecticut. Small brokers will get squeezed out, he says.

``Investors don't need to trade through 150 brokers,'' Leibowitz, 46, says. ``They may need them for research, but they can use commission-sharing agreements for that. It's harder to get best execution from the smaller shops, although some certainly can provide it.''

Sanford Bragg, president of Darien, Connecticut-based consulting firm Integrity Research Associates LLC, agrees. ``Money managers will continue to consolidate their trading, putting pressure on second- and third-tier firms and benefiting the 12 or so largest trading firms.''

At The Boston Company, change is already afoot. Brooks says the firm used to deal with 100 brokers. Now, it uses fewer than 50. As commissions sink and money managers get pickier, even the best brokers will be working hard for their money.

Behind the Ranking

All of the trades used in this ranking were reported during 2006. For North America, the ranking was limited to brokerages that handled at least 1.8 percent of the dollar value of stock trades made during the year. The same cutoff percentage was used for brokers in Asia and Europe and for the overall ranking.

The ranking measures the prices that brokers get for clients. Ancerno calculated average stock prices, weighted by the number of shares traded at each price, from the time clients placed buy and sell orders to the time brokers executed trades. It then calculated the average prices at which brokers executed stock trades and measured them against the volume-weighted average prices. The brokerages were ranked by difference between the two averages.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: April 23, 2007 00:01 EDT